What is your trusted source of information?
How oracle networks bring trusted intelligence to blockchain networks
Smart Contracts are a rapidly growing area of development that leverages Web 3.0 to enable fair decision-making. A smart contract is a computer program that is hosted on a blockchain network (“on-chain”) and executes when certain pre-defined conditions are met. They can be created by people, companies, machines, or other computer programs. The blockchain’s role is to host, enforce, and execute these contracts. Some of these contracts require information about the outside world. To provide them with trusted computation or information, these contracts utilize other “off-chain” networks called oracle networks. An oracle network is basically a collection of data providers that have agreed to be part of an information pool. By separating the information resource from the contract management resource, it creates a more fair contract environment.
One of the key benefits of the oracle network model with regards to a contract is that it minimizes potential corruption by separating the two important decision making elements of a contractual process: the execution and the decision.
In any contract, there is a consensus to the operational process: this is the execution. Also, they have an agreement of conditions that, when met, lead to its execution: this is the decision. Fairer contracts attempt to separate these tasks to mutually agreed upon external parties. For example, imagine a simple betting contract where two people bet on the outcome of a flip of a coin. Typically, one person flips (the execution) while the other person makes the call (the decision). The decision and execution are separated resulting in a fairer coin toss.
An additional benefit of oracle networks is that they utilize a consensus-based approach as opposed to a single source-of-truth, which makes them resistant to outside influencers. The traditional method of finding truth is to locate a single-trusted source, and then to assume that the information they provide is correct. This approach can easily be corrupted especially if it is susceptible to outside influences. The consensus approach is based on the assumption that truth is a matter of a social agreement, specifically, the aggregation of agreements reached by a community of experts. To corrupt the oracle network, it would take the corruption of at least half of the oracles in the network to create bias. This is made even more difficult the larger the oracle network.
An apt analogy for an oracle network is to think of it as a weather app that provides the temperature in Central Park based on feeds from a collection of weather sensors distributed in multiple locations in the park:
The more data providers an oracle network has, the more stable and reliable the feeds are it provides to the blockchain.
In the analogy, the weather app (the oracle network) provides a single reading based on some consensus calculation (e.g., mean, median, etc.) and that is what is fed to the smart contracts in the blockchain to most accurately represent Central Park’s temperature. Clearly, it is beneficial to the app’s calculation process if it has access to a lot of well distributed and redundant sensors since, at any given time, some can be broken (no reading) or faulty (outlier readings).
One of the largest oracle networks today with the most data providers is Chainlink.
As a Chainlink node operator, you transmit the data that are used to evaluate and execute smart contracts. Other nodes also provide data and all like data are aggregated in a data feed that is maintained through a Chainlink oracle network. A smart contract that requires the data as an input can request access to the Chainlink feed’s reference contract, which will be automatically populated by oracle reports showing the data provided by the nodes servicing the feed. The process through which this occurs is referred to as “Off-Chain Reporting”. Data values (e.g., exchange rates, temperatures, etc.) are gathered from the nodes participating in a particular data feed. If at least a minimum number of nodes provide a value, a report containing all of the values provided will be prepared by a randomly selected lead node, approved by the participating nodes, and then transmitted to an on-chain reference smart contract by a randomly selected participating node (called the “transmitter”). The report contains an ordered list of all of the oracle nodes’ observations and signatures, and that is fed to the reference smart contract where the median value is taken.
Data providers can be node operators or they can make their data accessible to a node or node operator.
Oracle node operators simply carry operational and security responsibilities and are basically transmitters of data they collect from reference sources. However, a data provider can also make their reference data available to one or more oracle node operators who pay for access to this data via API calls. When or how these nodes collect the data and from which sources create variations in the values that are then aggregated by Chainlink nodes in the reporting process. This method is represented by the weather app analogy whereby the app collects data from multiple areas of Central Park to arrive at a value that represents the overall temperature in Central Park.
What does the future look like?
Future growth of smart contracts is based on a supply and demand model. Demand is driven by the number of smart contracts created and the diversity of their information requirements on blockchain. Supply is driven by the sources and quality of data provided by the oracle networks. And, unlike most businesses that evolve first through growth in the demand space, this environment works in reverse because smart contracts are code and they cannot function without data. In the smart contract space, suppliers show up first in the oracle networks and then their job is to market their information and try to get developers to create smart contracts utilizing their data, thereby creating new demand. So, in the short-term, oracle networks like Chainlink are looking for reliable and trusted data sources (e.g., weather, company filings, exchange rates, etc.) that can potentially be leveraged in smart contracts in businesses like insurance, travel, legal, and gaming.
What about all the concern about the Web 3.0 and the energy-related environmental impact?
Ethereum is by far the largest blockchain supporting smart contracts. And there are many articles that attempt to approximate the energy cost required to run a smart contract which typically take the form of powering N million households for a day/month. Obviously, this raises a lot of concerns about the carbon footprint required for supporting Web 3.0 and its impact to our fragile global climate. The problem lies in the calculation process that Ethereum uses to arrive at consensus. Today, it uses the method called proof of work (PoW) which requires the nodes to compete in a winner-takes-all contest and rewards those with more computational power since they respond fastest. Ethereum plans to replace PoW with a proof of stake PoS algorithm which, according to Ethereum, will reduce energy consumption by as much as 99.95%. This shift to what is dubbed as Ethereum 2.0 or ETH 2.0 is currently scheduled for June 2022. It is this author’s opinion that, when that shift actually occurs, one of the main arguments against smart contracts will be eliminated and we could see a major jump in smart contract usage and development.
